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Retirement Planning

12/05/2018

“Roth IRAs must still follow many of the same rules as traditional IRAs, however, including restrictions on withdrawals and limitations on types of securities and trading strategies.”

Roth IRAs are very popular. You pay taxes on the contributions today, and then investors can avoid paying taxes on capital gains in the future. It’s a really smart strategy, if you believe your taxes are likely to be higher after you retire.

In Investopedia’s article,“Trading Options in Roth IRAs,”the use of options in Roth IRAs and some important considerations for investors are examined. Unlike stocks themselves, options can lose their entire value, if the underlying security price doesn’t reach the strike price. This makes them much more risky than the traditional stocks, bonds, or mutual funds that are typically in Roth IRA retirement accounts.

Although risky, there are situations when they might be good for a retirement account. Put options can be used to hedge a long stock position against short-term risks, by locking in the right to sell at a certain price. Covered call option strategies can be used to generate income, if an investor is okay selling her stock.

Many of the riskier strategies in options aren’t permitted in Roth IRAs, because retirement accounts are designed to help individuals save for retirement—not become a tax shelter for risky speculation. Investors should understand these restrictions to avoid issues that could have potentially costly consequences. IRS Publication 590 has several of these prohibited transactions for Roth IRAs. The most important is that funds or assets in a Roth IRA can’t be used as security for a loan. Since it uses account funds or assets as collateral by definition, margin trading usually isn’t allowed in Roth IRAs to comply with the IRS’ tax rules and avoid any penalties.

Roth IRAs also have contribution limits that may prevent the depositing of funds to make up for a margin call, placing more restrictions on the use of margin in these accounts. In addition, the IRS rules imply that many different strategies are off-limits, such as call front spreads, VIX calendar spreads and short combos. These all involve the use of margin.

It’s also important to note that different brokers have different regulations, when it comes to what options trades are permitted in a Roth IRA. The brokers permitting some of these strategies, have restricted margin accounts, where some trades that traditionally require margin are permitted on a limited basis.

The use of these strategies also depends on separate approvals for certain types of options trades, based on their complexity. Therefore, some strategies may be forbidden to an investor regardless. Many of these applications require that traders have knowledge and experience as a prerequisite to trading options, in order to reduce the likelihood of excessive risk-taking. Roth IRAs aren’t usually made for active trading, but experienced investors can use stock options to hedge portfolios against loss or generate extra income. These strategies can help improve long-term risk-adjusted returns and reduce portfolio churn. You should guard against using options as a mere speculative tool in these accounts, in order to avoid potential issues with the IRS and assuming excessive risks for funds designed to finance retirement.

For example, retirees should think about claiming Social Security as soon as they can, if they’re in very poor health or have a terminal illness.

While the benefit will be less if they file early, the greater number of individual payments will help offset the smaller benefit amount.

There are three ways that women can plan for a better retirement. Women should not rely solely on their spouses when planning for retirement. Instead, they should more directly participate in how they’ll secure their senior years. That’s because many of them are likely to live longer than their partners, according to an article from MarketWatch. Women should calculate the amount of income they anticipate receiving in retirement and consider other income streams.

In addition, they can talk about their estate plans with their spouses and family members and look for alternative income sources. One example is an immediate annuity. In the right circumstances, they can be a terrific strategy to improve one’s retirement prospects.

Remember that despite not having a 401(k), individuals can still save for retirement. Workers who don’t have the option of a workplace retirement plan, should ask their employer to set up one on the basis of incentives that the company will receive.

These workers can also look into opening a health savings account and an individual retirement account, preferably a Roth IRA, which offers tax-free growth on savings and penalty-free early withdrawals.

They also can choose to switch their status to a 1099 from a W-2 employee to establish a SEP IRA.

Finally, living together in retirement can be difficult for couples who are used to having work as a diversion. To overcome the obstacles, couples should talk about retirement and be honest about their expectations, rules, and disappointments. They should also find a common ground, if they have different interests. It’s healthy for husbands and wives to pursue their own interests and have some separate groups of friends.

11/05/2018

“Countless questions arise as you're planning for retirement. How much do you need to save? Could you be saving more? When do you plan to retire? Can you actually retire at that age and live comfortably?”

Can you believe that just 38% of Americans say they have a long-term financial plan, according to a recent survey? There are plenty of questions to be asking yourself before you retire, but there are three that can significantly decide if you're actually ready to say goodbye to working. Let’s look at these three important planning questions.

When to claim Social Security. Many people think that retirement and claiming Social Security benefits occur at the same time. However, they don't have to. You could elect to retire at age 60, but wait to claim your benefits until you reach 65. Remember that the amount of money you get in benefits, is linked to the age at which you start claiming them. Age 62 is the earliest you can claim Social Security. However, if you do, your benefits will be reduced by up to 30% of what they could be. For every month you wait, you'll receive slightly more with each check up to age 70. Your full retirement age (FRA) is the age when you’ll get 100% of the benefits to which you’re entitled. Waiting can have its advantages, but there's no single right answer for when you should start claiming. It all depends on your personal circumstances.

Will your retirement savings last? Take a look at how far your savings will last during retirement. To determine how far your money will go, calculate the amount you'll need each year to get by during retirement. With a number in mind, you'll be able to better determine how long your current savings will last. You might realize that you need more than you anticipated, especially if you're going to be spending several decades in retirement.

Paying for healthcare costs. Healthcare costs are one of the largest expenses in retirement. Know that the average retiree spends about $4,300 per year on out-of-pocket healthcare expenses. A total of two-thirds of that is spent on premiums. It’s important to understand that Medicare will help cover many healthcare expenses you'll face, but it doesn't cover everything.

It's hard to know the perfect time to retire, and you may never be 100% certain that the time is right. That’s all right if you've thought it through and can answer these important questions you'll face during your retirement journey.

10/22/2018

“Though retirement can be an exciting milestone to look forward to, for many older Americans, the thought of leaving the workforce is overwhelmingly stressful.”

A big part of the stress of retirement are all of the unknowns. There are still certain things you can do that will give you more confidence about your retirement, and help you make good decisions that are based on information, not hopes and dreams or fears. The Motley Fool has some suggestions in the article “3 Ways to Approach Retirement More Confidently.”

Start with a budget. The chances are that you don’t know how much money you spend every month. You’re working, money comes in and it goes out. However, if you know how much money you are spending, and what you are spending it on, you’ll be able to have a handle on how much money you’ll need for retirement. You’ll also be able to see where your discretionary dollars are going and make a conscious decision, as to whether or not those are dollars that should be going into long-term savings for your retirement.

Remember that while some expenses may go down—like commuting—others will stay the same. You won’t be going to the office every day, but you will want to enjoy yourself. What will your leisure and entertainment activities be, and how much will they cost? How will you handle health care costs? You should also remember that there will be quarterly taxes to be paid.

The more information you can pull together about your spending, savings and unavoidable costs, like taxes and health care, the better you’ll be able to plan for this next phase of your life.

How much income will your retirement accounts provide? We tend to focus on how much we need to save, but we should really focus on how much income our retirement savings will generate. How much will your IRA or 401(k) provide on a monthly basis?

Let’s say you’ve saved $500,000 in time for retirement. If you use an annual 4% withdrawal rate, which is the going rule these days, you’ll only have $20,000 a year generated for annual income. If you add Social Security to that amount, you may find that it’s not enough to enjoy the lifestyle you’ve anticipated for retirement. You may find that part-time employment can fill the gap, or you may need to work for a few more years.

Be smart about Social Security. Despite your years of saving, you will likely come to rely on Social Security to pay some of your bills. The smarter you are about your filing strategy, the better positioned you’ll be to maximize your Social Security benefits. If you wait until your Full Retirement Age, you’ll get the full monthly benefit you’re entitled to. If you can hold off claiming your benefits until age 70, you’ll max out as the monthly benefits increase every year you delay claiming.

Heading into retirement can be unnerving, as you move into new areas of financial management. Work with your estate planning attorney, who can give you guidance as you move into this new phase of life.

10/10/2018

“Delaying Social Security to full retirement age or later could cost you tens of thousands of dollars, maybe even more, in unnecessary taxes, if you live on your retirement savings while you wait.”

Many people overlook one of the most important parts of retirement planning. That’s the huge amount of taxes they may have to pay on their Social Security benefits. Kiplinger’s recent article, “Why Wealthy People May Want to Take Social Security at 62,” reminds us that Social Security rules of thumb aren’t perfect.

There are many good reasons to wait and take Social Security at full retirement age to get the full benefit amount. In waiting longer to file, the benefit can grow 8% a year from full retirement age to age 70. However, this one-size-fits-all advice may not be appropriate for everyone, especially for the wealthy.

The issue is that everyone wants to up their benefits on the front end. However, if there is no plan to boost those dollars on the back end, by keeping more of your Social Security dollars for yourself instead paying taxes, it’s not worth it. For many seniors, by the time they see they’re going to be giving up to 20% to 30% of their Social Security away in taxes, it’s too late.

Of course, conventional wisdom says that, if possible, you should wait and claim bigger Social Security benefits at age 70. That’s something high earners in many instances can do, but there are an increasing number of couples who’d be better off filing at age 62, and using that income to preserve and build their nest egg.

Look at this example: say that a husband was retiring at age 62. Without his regular paycheck, he and his wife were both about to find themselves in the lowest tax bracket they had been in since their first jobs: the 10% bracket. The question for them, like many Americans, is whether to tap into their IRA and 401(k) in retirement. These are typically the most significant accounts in terms of amounts saved through the working years. If this couple didn’t start Social Security at age 62, they’d need to withdraw heavily from pretax retirement accounts. Based on the monthly distribution rate needed to maintain their budget, those dollars (which are taxed at current income tax rates) would immediately place them into a higher tax bracket (perhaps the 22% bracket under 2018 tax rates).

However, if they take their Social Security payments at age 62, the monthly distribution amounts needed from their retirement savings accounts would be much less. This couple doesn’t want to drain their retirement accounts early in retirement, because it can mean lost opportunities for compounded growth of assets over a 20-to-30-year retirement. If the couple were to take their Social Security at age 62—while in a 10% tax bracket from age 62 to 70—the amount of tax they’d pay on those Social Security benefits would be minimal, maybe even zero.

Social Security is a complex topic, so speak with an estate planning attorney who can help make sure that your Social Security strategy aligns with your estate plan.

10/09/2018

“You need life insurance, if your death would hurt anyone financially. For many people, one policy is enough. However, for some, two or more make sense. Your needs should drive the number and type of policies you buy.”

The article explains that you can own several policies from different companies. However, when you apply, insurance companies will inquire about your existing coverage to make certain that the amount you want is reasonable.

It’s not uncommon to purchase a lot of coverage without any problems. An insurance agent will usually ask why you need a great amount of coverage, if the total coverage would exceed 20 to 30 times your income.

A frequent need to purchase life insurance coverage is to replace income in the event that the main income-earner passes away prematurely. The answer to this is term life insurance. This policy will cover you for a certain period, like 10, 20, or 30 years. Hopefully, when the term expires, you won’t require that life insurance, because your debts are paid, and you’ve finished raising your family.

Rather than purchasing one large policy, you could get multiple policies of different lengths and amounts to match your family’s needs over time. As an example, instead of getting a single 30-year $1 million policy, you could buy three policies: a 10-year for $500,000; a 20-year, $300,000 policy, and a 30-year, $200,000 policy. This type of “laddering” strategy can save money, and it can work, if coverage needs decrease. This way, you can predict them accurately. At least, that’s the theory.

Note: if you decide to buy just a single policy and discover later that you don’t need as much life insurance coverage, most carriers will let you lower the coverage and pay less.

There are also other reasons to buy coverage, besides replacing income. These can include small-business owner needs, long-term care and estate planning.

Talk to an experienced estate planning attorney about how life insurance can fit in your plans.

10/08/2018

“The National Institute for Retirement Security examines the retirement account balances, or lack thereof, for all working-age individuals.”

Can you believe that the “typical working American” doesn’t have any retirement savings? That’s according to a new report from the National Institute on Retirement Security.

Think Advisor’s recent article, “Most Americans Have $0 Saved for Retirement: NIRS” says that, using U.S. Census Bureau data, the report looked at median retirement account balances for those age 21 to 64. The report revealed that nearly 60% of all working-age individuals don’t have assets in a retirement account. That’s based on the Census Bureau’s Survey of Income and Program Participation data from the year 2014.

With 59.3% of people not owning a retirement account, a worker in the middle of the overall workforce would have a goose egg in retirement savings. The National Institute on Retirement Security report found that nearly about three-quarters of workers in the 21-to-34 age bracket, over half of those ages 35 to 44, half ages 45 to 54, and also about half in the 55-to-64 age range don’t have a retirement account.

The report included in its definition of retirement accounts employer-sponsored plans like 401(k)s, 403(b)s, 457(b)s, SEP IRAs and Simple IRAs, as well as private retirement accounts—such as traditional and Roth IRAs. In the report’s analysis, an individual was deemed to own a retirement account, if her total retirement account assets were more than zero. There’s a significant gap between older and younger folks in retirement account ownership, and the report found that that this gap is much wider across income groups.

“Individuals with retirement accounts have a higher median income of $51,024, compared to $17,004 among individuals without retirement accounts—three times as large,” the report states.

The research also showed that the median account balances were insufficient, even among individuals with retirement accounts. In fact, for those approaching retirement (age 55 to 64) with retirement accounts, the average balance was $88,000. The report suggested this amount would only provide a “few hundred dollars per month in income if the full account balance is annuitized, or if an individual follows the traditionally recommended strategy of withdrawing 4% of the account balance per year (this amounts to less than $300 per month).”

In addition, the report found that 22% of working individuals age 21 to 64 with retirement savings had saved less than a year’s income. Among working individuals closest to retirement (age 55 to 64), just 17% of those with retirement savings saved this amount. That’s not many. Given these standards, early retirees would need to save retirement assets, equal to 14 times their salary at age 62. The savings target of 10 times income at age 67, is designed to enable income payments to last until a person is 93.

09/27/2018

“The president's plan aims to reduce “regulatory barriers” to MEPs. It also seeks a review of RMDs.”

President Trump signed an executive order, instructing the Labor Department to relax rules on small-business Multiple-Employer Retirement plans (MEPs) and telling the Treasury Department to look at Required Minimum Distributions (RMDs) from 401(k)s and IRAs.

Trump went on to say that this would provide “retirement security to countless American workers and their families. We believe all Americans should be able to retire with the confidence, dignity and economic security that they want.”

Trump explained at the signing that the “complexity of current federal regulations makes it extremely difficult for small businesses to afford retirement savings accounts for their great employees. While large companies can afford to deal with these burdensome regulations, small companies just can’t handle it.”

“This means that 50% of Americans employed at small businesses with fewer than 100 employees, don’t have access to 401(k)s or other retirement plans,” he said.

For this reason, Trump said he’s lowering the costs of retirement plans, so they can become an affordable option for businesses of all sizes. “Small businesses”, Trump said, “will no longer be at a competitive disadvantage and small business workers will now be treated more fairly and have more choices.”

Trump said his executive order decreases the “regulatory barriers,” so small businesses are able to create “low-cost association retirement plans,” also called multiple employer plans, or MEPs. The IRS requires savers to begin taking RMDs, calculated on the basis of life expectancy, at age 70½.

09/19/2018

“Surviving spouses don't have to repay every debt of a deceased spouse. Here's what you need to know.”

It’s not uncommon for a senior to suddenly find himself the executor of his spouse’s will and have to face debt that was not taken out together.

Let’s say that you’re 67, and your husband passes away suddenly. What if he decided last year that he wanted to explore the open road and took out a $50,000 loan, in his name only, to buy a Class A recreational vehicle (RV) with beechwood cabinets and custom sea glass interiors that sleeps five. You didn’t want it and you can’t afford it. What do you do?

Is the surviving spouse responsible for paying the loan, or can she surrender this behemoth to the bank?

There’s usually spousal liability for debts incurred by the non-debtor spouse only for necessary goods and services, like medical expenses. Therefore, a Class A RV with beechwood cabinets and custom sea glass interiors that sleeps five hardly qualifies. However, the surviving spouse’s options depend on the contracts executed by the late husband and the discussions that his widow is now having with the bank.

Any assets in the name of decedent—like the Class A RV with beechwood cabinets, etc.—or paid into the deceased spouse's estate, would have to be liquidated and used to pay creditors in the order of priority, as determined by state statute

In New Jersey, the law says the funeral director must be paid before any other creditor, followed in order of priority by the other costs of administering the estate, like the court and attorney fees, the office of the public guardian for elderly adults, taxes, medical expenses, judgments and then all other claims.

Any life insurance or retirement funds that are paid directly to a beneficiary, and not paid to the estate of the decedent, don’t have to be used to pay the decedent's debts and expenses, unless the beneficiary is required to pay the debt, as a result of being a spouse obligated to pay for necessaries, a co-signer or obligor or for similar reasons.

However, if the estate becomes insolvent and there’s insufficient funds to pay all outstanding claims, claims within the same priority level must be paid pro rata.

Talk with an experienced estate planning attorney about the specifics of your situation.

09/18/2018

“One of the biggest challenges for single parents, is learning to balance competing financial demands.”

Whether they are single by choice, divorce or the death of a spouse, single parents typically don’t have the security of a second income or a safety net. They need a financial plan to prepare for unanticipated events. A plan will also help with care for the children and retirement.

CNBC’s recent article, “Five financial essentials for single parents,” says that when single parents try to satisfy their kids, it can lead to a severe unintended consequence: placing their children ahead of their own retirement needs.

In addition to naming a guardian in a will, there are five other critical financial moves.

Set up an emergency cushion. A solid emergency fund is the initial step. You should have three to nine months' expenses in that fund. Don’t forget to add whatever costs the kids have each month, like sports and activity fees, school lunches, clothing and school supplies.

Check on the right amount of insurance. Life insurance can help your family cope financially without your income. Your income could be lost through illness, so consider disability insurance. If you own a home, purchase flood insurance.

Create definitive savings goals. You most likely have things that you'd like to do for your family, such as purchase a home, pay for college or plan a special vacation. Each of these will be on a different timeline. Divide this into near-, medium-, and long-term savings goals. Your near-term goals will happen within five years. The way in which you invest these three silos of money is based upon your unique time horizon. If you have decades before you retire or need to pay tuition for a newborn, you can take on more risk. Examine your allocation among these accounts and review them once a year, to see if the amounts you're putting in each—and the investment strategies—still match your goals.

Have a set savings percentage. There's no set number that works for everyone. There are recommendations to save at least 6% or 9% of your income, but it’s not always possible. If you can only save $30 a month, do it and be glad! Just creating a positive habit of saving is important. Even if you save as little $10 a month, do it with the notion that you'll increase the amount, when your finances permit. A good rule of thumb is to put away 10% of your gross, not take-home, pay and as you get raises, increase your savings rate. Developing that disciplined habit of saving can help you accomplish many of your financial goals.

Make your retirement plan. With your savings and Social Security, achieving a 50% replacement of income may be enough for people with modest salaries. However, a person who earns $100,000 will be more likely to want 85 to 90% of income. Therefore, they’ll have to save more. In sum, the more you have, the more you’ll need to save to be able to spend the same amount of money and live the same way in retirement.

If your employer offers a workplace retirement plan, contribute in order to get the match. After all, it's free money! If you don’t have a workplace plan, set up an individual retirement account (IRA) and make the deposits automatic.